A memo to federal officials from Arkansas’ Medicaid leaders outlines the framework of the agreement driving a legislative debate on the topic.

Arkansas lawmakers, Gov. Beebe and administration officials have secured permission from the feds to use Medicaid expansion dollars in a forthcoming health insurance exchange that will subsidize premiums for low-income Arkansans seeking health care coverage.

The memo, which was dated March 13, 2013 from Arkansas Medicaid Director Andy Allison, seeks to clarify details that would allow those making up to 138% of the federal poverty level to enroll in health insurance exchange plans starting in 2014.

The memo states:

This group of adults would select coverage from among the insurance carriers offering a QHP in the “Silver” category of the exchange. “Silver” is the health plan category receiving the greatest level of federal subsidies for premiums and cost-sharing for the non-Medicaid population, i.e., the health plan level designed to best serve those below 150% FPL. Limiting Medicaid-funded participants’ options to the premium assistance program may require a federal waiver. Similar waivers have been granted in the past. The state also intends to develop a proposal for future review that structures benefits in a way that further enhances participants’ ownership in health care purchasing decisions.

Low income enrollees’ essential health benefits would be covered through the same health insurers serving the State’s individual and small group health insurance markets. It is Arkansas’ intent through this plan to increase participation and competition in its health insurance markets, intensifying price pressures and reducing costs for both publicly- and privately-funded health care.

Where necessary for low income individuals with exceptional needs, Arkansas Medicaid would provide some supplemental services. Also, some Federal rules for Medicaid-funded health insurance would apply, such as due process. The cost of the low income premium assistance and supplemental services for newly eligible adults would be funded through 100% federal financing from 2014 through 2016, declining to 90% by 2020 and thereafter, subject to continued legislative support.

The memo also highlights what Arkansas officials see as benefits to the plan they are tailoring. On “integration and efficiency,” Allison says he sees the Arkansas option as being “a more efficient mechanism for achieving coverage for Arkansans and should lead to better health outcomes.”

“We will seek increased flexibility in serving the existing Medicaid population and new participants,” the memo states. “Flexibility for both cost savings and developing solutions tailored to Arkansas populations are critical components of the emerging plan.”

The memo also touches on “market-driven provider reimbursement and improved access,” declaring that with the private option route Arkansas could “help rationalize provider reimbursement, bringing more providers into the program and significantly reducing the need for providers to cross-subsidize. The costs of increased access for low income Arkansans would be determined directly by market-based interactions with providers.”

Touting “continuity of coverage,” the memo also clarifies that families can stay enrolled in the same plan as their income fluctuates. The memo further explains that Arkansas’ payment improvement initiative may fold into the plan.

Three other areas highlighted in the memo emphasize “personal responsibility,” “impact on health insurance exchange,” and a “reduction in enrollment in current Medicaid programs.”

Personal Responsibility – Individual cost-sharing requirements for the low income adults under 138% FPL have not been developed, but could be comparable to cost-sharing requirements in the exchange, where individuals are subject to scaled income-related obligations, e.g., approximately 2-5% of income for the lowest-income participants in the exchange. Medicaid’s ability to use cost-sharing tools such as co-pays and co-insurance was recently increased under proposed regulations issued by the federal government in January, which would allow cost-sharing at or above levels for individuals served through the exchange with incomes between 139-150% FPL.

Impact on Health Insurance Exchange – The state’s exchange would benefit from the addition of Medicaid-funded participants, potentially doubling the number of covered lives. This would enhance the attractiveness to recruit new carriers and potentially increase the competitive aspects of the Arkansas health insurance market. Importantly, the need to retain local control of consumer engagement and plan management is increased under Arkansas’ approach to low income premium assistance.

Reduction in enrollment in current Medicaid programs – The existing patchwork of traditional Medicaid programs could be scaled back. ARHealthNetworks would be eliminated, as would the family planning waiver and potentially other limited benefit Medicaid programs such as the Breast and Cervical Cancer program and the Tuberculosis program.

Other categories such as Pregnant Women and Medically Needy would continue to exist (required by CMS), but would largely dry up because the people who would have entered those categories will already have coverage. The state also intends to use available flexibility to serve higher income children in the ARKids B program through their parent’s private insurance, keeping family units together in a single insurance plan.